Running a UK limited company often means managing personal and business money at the same time. Directors may sometimes pay company expenses from their own pocket. In other cases, they may withdraw funds before salary or dividends are declared.
These transactions are common in small and growing businesses. However, when they are not recorded properly, they can create tax exposure, reporting issues and compliance questions from HMRC.
Many directors and accountants only review director balances at year-end. By then, interest charges, tax liabilities and penalties may already apply. This is why director’s loans need regular monitoring and clear records.
This guide explains:
- What a director’s loan and director’s loan account mean
- How director’s loans work in practice
- Tax rules and interest requirements
- Common risks and compliance issues
- How accountants can manage director’s loans correctly
What is a Director’s Loan?
A director’s loan is money that moves between a director and their limited company outside of salary, dividends or expense claims.
It can work in two ways:
- The director lends money to the company
- The company lends money to the director
Both situations are recorded in the director’s loan account (DLA).
This account tracks all non-payroll transactions between the director and the company.
What is a Director’s Loan Account?
A director’s loan account is part of the company’s balance sheet. It shows how much is owed between the director and the business.
Two Possible Positions
| Position | Meaning |
|---|---|
| In credit | Company owes money to the director |
| Overdrawn | Director owes money to the company |
How Do Director’s Loans Work in Practice?
Director’s loans usually arise in everyday business situations.
Common Examples
- Paying company bills personally
- Taking money before dividends
- Using company funds for personal expenses
- Funding business cash flow
- Repaying personal loans to the company
These movements should always be recorded clearly.
Unrecorded director transactions often lead to year-end adjustments and tax corrections.
When is a Director’s Loan in Credit?
A director’s loan account is in credit when the company owes money to the director.
Typical Situations
- Director injects start-up funds
- Director covers supplier invoices
- Director pays HMRC on behalf of company
Tax Position
When the account is credited:
- The director can withdraw funds later tax-free
- Interest may be charged by the director
- No additional tax normally applies
This position is usually low risk.
When is a Director’s Loan Overdrawn?
An overdrawn director’s loan account means the director owes money to the company.
This is where most tax issues arise.
Common Causes
- Early dividend withdrawals
- Personal spending from company account
- Short-term cash advances
- Missing payroll adjustments
Risks of Overdrawn Accounts
| Risk Area | Impact |
|---|---|
| Corporation tax | Section 455 charge |
| Personal tax | Benefit in kind |
| Reporting | Disclosure required |
| HMRC reviews | Higher scrutiny |
Overdrawn balances should never be ignored.
Tax on Director’s Loans in the UK (2026 Rules)
Director’s loans are subject to specific HMRC rules.
Section 455 Corporation Tax
If an overdrawn director’s loan is not repaid within 9 months and 1 day after the company’s year-end, the company must pay Section 455 tax at the prevailing HMRC rate on the outstanding balance.
- The tax is temporary but can impact cash flow
- It is only refunded after the loan is fully repaid
- Rates are set by HMRC and may change, so current guidance should always be checked
Benefit in Kind
If interest is not charged at HMRC’s official rate:
- The director receives a taxable benefit
- Class 1A NIC applies
- Personal tax increases
Interest Rate Requirement
HMRC publishes official rates annually.
Interest below this rate creates tax exposure.
Interest on Director’s Loans
Interest rules apply when:
- The company lends to the director
- The loan exceeds £10,000
How Interest Works?
| Item | Treatment |
|---|---|
| Charged interest | Company income |
| Uncharged interest | Benefit in kind |
| Excessive interest | Transfer pricing risk |
Accountants should review interest annually.
Example: Director’s Loan Account in Practice
Scenario
A director withdraws £25,000 in July 2025.
Company year-end: 31 March 2026.
Loan remains unpaid.
Outcome
| Item | Amount |
|---|---|
| Loan balance | £25,000 |
| Section 455 (33.75%) | £8,437.50 |
| BIK exposure | Yes |
| HMRC reporting | Required |
This could have been avoided with early planning.
Repaying a Director’s Loan
Repaying director loans should be done promptly to avoid tax penalties.
Common Repayment Methods
- Dividend declaration
- Salary adjustment
- Cash repayment
- Expense offset
- Director funding
Important Rule
HMRC applies “bed and breakfasting” rules.
Temporary repayments followed by new withdrawals may still be taxed.
Director’s Loans to Companies
Sometimes, the director lends money to the company.
This is common in early-stage businesses.
Benefits
- Improves cash flow
- Avoids external borrowing
- Shows financial support
Tax Treatment
- Interest is taxable income
- Company can claim deduction
- Loan agreement recommended
This structure is often safer than overdrawing.
Managing Director’s Loans Across Multiple Years
Poorly managed director’s loans can roll forward year after year, increasing tax risk.
Best practice includes:
- Maintaining a written loan agreement
- Reviewing balances quarterly, not just at year-end
- Clearing overdrawn balances before deadlines
- Documenting interest calculations
- Avoiding repeated short-term repayments
Consistent monitoring reduces HMRC exposure.
How Accountants Support Director’s Loan Management?
Accountants play a key role by:
- Tracking director’s loan accounts in real time
- Advising on repayment timing and structure
- Calculating interest and benefit in kind correctly
- Ensuring correct disclosures in statutory accounts
- Supporting HMRC compliance and enquiries
Proactive oversight prevents avoidable penalties.
Director’s Loans Rules Every Accountant Should Know
Key compliance rules include:
Failure to follow these increases HMRC risk.
Director’s Loan Tax Avoidance: What to Avoid?
HMRC monitors director’s loans closely.
Avoid practices such as:
- Repeated short-term repayments
- Artificial dividend recycling
- Hidden personal expenses
- Unsupported balances
- Late disclosures
These patterns may trigger investigations.
Conclusion
A director’s loan is not just a temporary cash movement. It sits at the centre of accounting, tax and compliance for UK limited companies.
When managed correctly, it supports business growth and flexibility. When ignored, it creates unnecessary tax charges and reporting issues.
Regular review, clear documentation and early planning remain the most effective way to manage director’s loans in 2026.
FAQs
What is a director’s loan account?
It records all non-salary transactions between a director and the company.
What happens if a director’s loan is overdrawn?
If not repaid within 9 months after year-end, Section 455 tax and benefit in kind rules may apply.
How do I repay a director’s loan?
Through dividends, salary adjustments, cash repayment, or expense offsets.
How does a director’s loan work?
Money moves between director and company and is tracked in the DLA.
Is tax charged on director’s loans?
Yes, if overdrawn and unpaid, Section 455 and BIK rules apply.
How long can a director’s loan remain unpaid?
Up to 9 months after year-end before tax applies.
Can a director lend money to their company?
Yes and interest may be paid tax-efficiently.
How are director’s loans repaid?
Through dividends, salary, cash payments or expense offsets.
Divyanshi is a subject matter expert in the UK accounting space, creating clear and easy-to-read content for accountants and businesses. She covers topics such as VAT returns, Self-assessment tax, bookkeeping, business planning and Year-end accounts. By understanding the common challenges faced by accountants and business owners, she focuses on writing content that answers real questions and simplifies complex topics. Her approach keeps information clear, relevant and useful for everyday business needs.
